Louisiana governor urges tax hike, tapping reserves to fix budget gap

(Reuters) - Louisiana Governor John Bel Edwards on Tuesday urged state legislators to approve a plan to increase taxes and tap reserves to plug the largest budget shortfall in state history.

Louisiana faces a projected shortfall of $750 million this fiscal year and the gap is expected to grow to $1.9 billion in the next fiscal year beginning July 1 from deteriorating tax revenues and a drop in oil prices.

Edwards, a Democrat who took office earlier this month, wants to add 1 cent to the state's existing 4-cent sales tax, excluding the purchase of groceries, prescription drugs and residential utilities. The proposed measure is expected to raise $216 million by late June.

The plan also taps $128 million from the state’s rainy day fund and $200 million paid by Plc to reimburse cleanup efforts following the 2010 Deepwater Horizon oil spill. The state would also cut some discretionary funding.

If enacted, the governor's plan would reduce but not eliminate the deficits the state faces.

“The days of using budget gimmicks that helped us limp along are over,” said Edwards, the first Democrat to hold the office of governor in Louisiana since 2008. “This administration will remove the smoke and mirrors and provide the facts of where we are and where we are going.”

Edwards warned that if leaders did not act quickly, universities could struggle, distressed hospitals could close, and public education could suffer severe cuts.

“Raising taxes is not my first, second, or even third option when seeking to fill the state’s budget shortfall,” said Edwards. "Unfortunately, those cuts will not be enough to bridge the enormous shortfall we face today.”

The state's overall budget problems stem from the drop in oil prices, but much of the shortfall also comes from previous excessive use of one-time money and lower-than-expected revenues, the governor's office reported.

Louisiana is now contending with years of unresolved structural budget deficits that have collided with a weakening state economy and a sharp drop in revenues from oil and gas extraction taxes, Moody's Investors Services said in December. Moody's rates Louisiana Aa2 with a negative outlook.

During Edwards' inaugural address last week, he pledged to begin accepting federal funding to expand healthcare to residents through the Affordable Care Act, also known as Obamacare.